Senior Fellow Bill Harrington Submits ESG Counter-Proposal to International Organization of Securities Commissioners (IOSCO)

September 13, 2021

On September 6, Senior Fellow Bill Harrington submitted a wake-up counter-proposal to the International Organization of Securities Commissioners (IOSCO) regarding its July proposal to regulate ESG analytics providers. IOSCO is an association of 220 organizations from one hundred-plus countries that regulate 95% of the world’s securities markets. “Eight U.S financial regulators and infrastructure providers — including the Securities and Exchange Commission and the Commodity Futures Trading Commission — are IOSCO members.

The breadth of IOSCO’s reach demonstrates the depth of trouble that the IOSCO proposal would create for social and natural systems around the world. In short, the IOSCO proposal would obligate IOSCO members to regulate ESG analytics just as they regulate credit ratings, namely, by addressing processes at the expense of robust analysis.

Bill’s counterproposal calls out the IOSCO negligence in conflating ESG analytics with credit ratings. From page 6:

“ESG analytical products on the one hand and credit ratings on the other hand differ so fundamentally for at least three major reasons that the respective decision-making processes should also fundamentally differ.

“1. ESG ratings and data products are intended to be transformative and descriptive whereas credit ratings are intended to be primarily descriptive. ESG practitioners and advocates want every entity in the world to continually boost social and natural systems and, consequently, to improve ESG ratings and evaluations. In contrast, there is no reason for a debt issuer to adopt the credit profile of a higher-rated entity. All credit profiles other than immediate default are valid goals.

“2. ESG analysis that pertains to climate must be calibrated to a degree of specificity that is orders of magnitude more acute than the very gross categories that comprise the full range of NRSRO credit ratings — typically no more than 20 possible ratings.

“3. ESG analytics is susceptible to grade inflation on a much larger scale than mainstream credit ratings because entities that invite ESG scrutiny often want “best-in-class” designation.”

Bill presented a big-picture critique of the IOSCO proposal in a Croatan View “IOSCO Should Back Off ESG Ratings & Data Providers” of August 30.

“ESG analysis is a nascent discipline that needs time, space, and open-ended public dialogue with the whole wide world to define the most useful sustainable practices and then evaluate them.”

“IOSCO and members must not direct ESG analytics providers on how to govern themselves unless the goal is to undermine all forms of sustainability as quickly as possible.”

Bill is spending the next year living in a variety of East Coast locales. To learn more about Bill and his ten-year, to-date self-funded research advocacy, please see his bio.